Thursday, July 3, 2008

Charges for Pension and Investment products

The following is an alphabetical list of the types of charges that may apply to the Investment and Pension products that are available in the Irish market today.

Allocation Rate - This term applies to the amount of money that will be invested in your policy/plan from the contribution or payment that you make. A 97% allocation rate on €10,000 would mean that €9,700 is actually invested so there is an up-front charge of €300.

Annual Management Charge - The institution that looks after your policy/plan charge you a percentage of the value of your fund each year for 'managing' your money in the funds selected. This charge is made every year while your fund is under management and is applied whether your fund increases or decreases in value.

Bid/Offer Spread - This 'spread' is usually about 5% of your payment and is made when you go to 'sell' or cash in your investment.

Contribution Charge - Similar to an allocation rate, especially on regular contribution pension or investment plans. For example, a Standard PRSA can have a maximum contribution charge of 5%. If you agree to invest €300 per month then €15 of this is take as a charge on every payment you make. So, €285 is invested in your plan.

Early Encashment Charge - If you invest €10,000, and it is your intention to leave this for a period of 10 years, this will not concern you. This charge is made if you cash in your investment 'early' (normally in the first 5 years). The typical scale could be 5%,4%,3%,2%,1% (of your payment) in years 1,2,3,4,5 respectively.

Execution-Only Fee - A fee charged by an advisor for setting up a product where you have selected the product provider that you want to deal with and the type of plan that suits you best.

Fee Based Advice - You pay an advisor a fee for his/her advice on what the best course of action is for you in respect of formulating a financial plan of action.

Initial Commission - Commission paid to an advisor/agent in the first year of setting up a product. This is normally paid from an allocation rate charge, bid/offer spread, contribution charge or nil-allocation period.

Nil-Allocation Period - A specific period on a regular contribution policy/plan where no money is invested in your plan eg. 3 to 6 months.

Override Commission - A payment made by an institution to an advisor/agent outside of the normal commission structure. This payment does not impact the cost to you. It is sometimes paid to an advisor/agent for placing a certain volume of business with the institution.

Policy Fee - A regular charge that is taken monthly or annually, by the institution, from the payments that you make. It is normally about €2 or €4 per month and will continue to be deducted even if you stop paying into the plan.

Renewal Commission - A payment made by the institution to the advisor/agent every year for the duration of the plan. This is normally paid out of a contribution charge.

Trailer Commission - An annual payment made to an advisor/agent for the duration of the policy/plan. This charge is made on the value of the funds that you have invested and can be in the range of 0.05% to 1% of the value of your fund.

Not all of these charges will apply to individual products but there may be a combination of a few of them on the product that you may be buying. You should ask for a written breakdown of these charges before you purchase a product.

I hope I have not forgotten any?

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